Weak-form efficiency in Islamic equity markets: a multi-frequency analysis incorporating non-linearity and structural breaks

Purpose This study aims to examine the weak-form market efficiency of Islamic stock indices across 11 countries. It aims to contribute to the Islamic finance literature by applying a rigorous methodological framework designed to overcome limitations identified in previous research. Design/methodology/approach This study uses daily data from the Dow Jones Islamic Market indices. The methodological approach involves an enhanced testing framework. This framework incorporates pretesting for nonlinearity and structural breaks to ensure the appropriate selection of unit root tests and wavelet decomposition to analyze market efficiency across distinct investment horizons (short term, medium term and long term). Findings The empirical results of this study consistently show that the Islamic stock indices under examination deviate from weak-form market efficiency. This inefficiency persists across all tested investment horizons. Furthermore, the evidence reveals complex nonlinear dependencies and persistent violations of the random walk hypothesis within these markets. These findings suggest the potential for exploitable price predictability. Originality/value This study offers a significant contribution to the Islamic finance literature by implementing a methodologically robust framework for assessing market efficiency in Sharia-compliant markets. The use of pretesting for nonlinearity and structural breaks, combined with wavelet decomposition analysis, addresses critical shortcomings in prior studies. The findings highlight the importance of methodological rigor when testing market efficiency hypotheses within ethical investment contexts. They also offer valuable implications for portfolio management, investment strategy formulation and regulatory policy development within the Islamic financial ecosystem.